Mining is the process of validating transactions on a blockchain network. A blockchain is a record of all public transactions for a cryptocurrency. Each new transaction is called a block.
Difference between mining and staking
Coins can be divided into 2 when it comes to validating transactions on their blockchain networks – Proof of Workand Proof of Stake.
In Proof of Work, transactions are validated by solving complex mathematical transactions by using computers or platforms known as rigs. This is known as mining. Examples of coins being mined are bitcoins and bytecoin.
In Proof of Stake, transactions are validated by individuals holding a certain volume of coins. For some coins like PIVX, this is done by running a masternode. A masternode is simply a certain number of coins kept in a wallet with an up-to-date blockchain. In other coins like Peercoin, transactions are validated by holders of the oldest number of coins. After a block has been validated, coins start to age again.
Advantages and Disadvantagesof mining
Mining platforms for proof of work coins are easily adaptable, so they can easily be configured to mine different coins or even a combination of coins.Mining does not require one to hold the coin being mined. Staking on the other hand, requires a large volume of coins.
The more popular a coin, the less profitable it is to mine. This is because lots of miners then decide to devote more resources to mine it and the hash rate goes down. Mining however requires constant electricity, which is a rarity in Nigeria. Mining equipment is quite expensive, running into millions of naira asides the cost of power.
What equipment do you need for mining?
In earlier days, mining for proof of work coins could be done using old phones or regular computers. Individuals have however devoted greater resources, and there are now mining rigs (also known as Graphic Processing Units) that are used. A GPU is simply the shell of a desktop computer without a monitor and other accessories.
These rigs could cost as high as $5000 to $6000 depending on the capacity of the card. The attention on mining means that these cards have become more expensive. The rigs are powered by electricity which has to be constant.
Even bigger than mining rigs are ASICs, which have higher processing power.
As strange as it may seem, there are places in Nigeria that have near constant power supply which is suitable for mining.
There are also mining pools where individuals pool resources to buy mining equipment, or invest in such pools.
Individuals can also opt to participate in bitcoin cloud mining where one can purchase mining capacity in data centres. This saves them from the need to set up their own mining installations. Note though that cloud mining is more prone to fraud and yields lower profits.
How lucrative are the returns from mining?
Returns on mining depend on various factors, such as the cost of mining equipment and electricity. Returns also depend on the price of and demand for a coin. If the price of a coin spikes, miners tend to devote more resources to it, thus reducing the returns. This also works inversely. Mining returns are thus not constant.
One can also mine more than one coin at a time, which provides more income. Miners however can make as much as $500 to $1000 a month.
Mining profits are made gradually however, so do not invest in it if you do not have a long term view.